In the coming decade, the focus has to shift from investment by energy producers to investment by energy consumers, including firms, households and municipal authorities. Of the additional investments needed in the next decade, 65% to 75% are expected to focus on improving building insulation, upgrading industrial processes, purchasing more efficient equipment and investing in new transport technologies.
The European Investment Bank Investment Survey (EIBIS) provides a window into climate-related investment by European firms:
• 23% of European firms say that climate change and related weather events have already had a major impact on their business, vs. 14% in the United States. Another 35% of European firms report climate change effects to be minor.
• Just over half of EU firms do not think the transition to a net-zero emission economy will affect their operations over the next five years, and of those that do, the majority see the transition as an opportunity. The firms that expect the transition to have an impact say it could stimulate demand and improve their reputation. Firms are more likely to see the effect on their supply chain as negative, however, and energy-intensive firms expect more negative effects overall.
• 45% of EU firms have invested in climate change mitigation or adaptation measures (vs. 32% in the United States), but fewer plan to do so in the next three years. The investment figure varies from 50% in Western and Northern Europe to 32% in Central and Eastern Europe. A slightly lower 40% of European firms are planning to invest in climate measures in the next three years. A majority of European firms, 75%, say uncertainty about regulation and taxation is impeding climate-related investment.
• The proportion of EU firms reporting investment in energy-efficiency measures increased to 47%, up almost 10 percentage points over 2019. The average share of investment devoted to energy efficiency rose from 10% to 12%, with large firms and manufacturing firms more likely to invest.
While more than half of municipalities have increased climate change mitigation investments over the past three years, two-thirds still consider the level of investment to be inadequate. The EIB Municipality Survey 2020 reveals that 56% of municipalities increased climate investment, but 66% consider their climate investment over the last three years to be inadequate. For investment in climate change adaptation, 44% increased investment and 70% consider investment to still be inadequate. This suggests that climate adaptation investment could be a more pressing issue in the future.
Investing for digital transformation
Europe’s future prosperity depends on leading the next wave of industrial transformation: digitalisation. The digital revolution has already transformed industries, production processes and ways of living and working, but many of these shifts are only just beginning. As with previous technology waves, taking an early lead can be critical for lasting competitiveness. Yet with the global innovation and technology landscape changing rapidly, Europe risks becoming entrenched in its position as a follower on digitalisation.
So far, the impact of digitalisation has been largely benign. Technological waves, like the first industrial revolution, have driven massive changes in the nature of work, its location and the skills people need. Digitalisation has already caused a shift towards high-skilled occupations, with these jobs tending to cluster in favoured urban areas, particularly capital city regions. EIBIS data present interesting evidence. Firms that have adopted digital technologies are also more productive, more innovative and more likely to export. They are creating more employment than non-digital firms and also pay higher wages on average. Digitalisation has provided a strong stabilising effect during the COVID-19 crisis.
But a painful process of re-adjustment awaits firms and regions that lag behind. A trend towards economic and geographical polarisation is emerging, contrasting the digital leadership of some firms and regions with the slow progress of others. Job growth in recent years has been driven by higher-skilled positions. In the near future, the accelerated loss of low and medium-skilled jobs through automation could create a massive need for re-skilling.
The adoption of digital technologies by EU firms is growing, but it has not yet closed the gap with the United States. By 2020, 37% of European firms had still not adopted any new digital technologies, compared with 27% in the United States. Encouragingly, the proportion of digital firms in the European Union grew by nearly 5 percentage points over the 2019 level, but the United States saw a comparable increase. The gap with the United States is particularly marked in the construction and service sectors, and in the adoption of technologies associated with the internet of things.
Firm size and market fragmentation appear to be holding back digital adoption in Europe. High fixed costs and financing obstacles for intangible assets often make it easier for large firms to invest in digital technologies. Adoption rates for micro and small firms are notably lagging on both sides of the Atlantic. The comparatively small average size of European firms – itself a partial reflection of the continued fragmentation of European markets along national lines, including for digital services – is likely contributing to the continent’s low digital adoption rates.
Municipal investment in digital infrastructure is advancing, but disparities could result in further polarisation. Over the last three years, 70% of European municipalities increased investment in digital infrastructure. Looking forward, municipalities state that digital remains a top priority, alongside social and climate-related investments. But there are strong regional disparities in the perceived adequacy of municipal infrastructure investment. A lack of digital infrastructure is seen as a major obstacle for investment by 16% of EU firms, vs. only 5% in the United States. There is also some evidence that digital adoption by firms is higher in municipalities that have better digital capacities and infrastructure.
Europe is losing ground within a rapidly changing global innovation landscape. While still at the forefront of technology, the European Union is investing less in research and development (R&D) as a percentage of GDP than other major economies, and China is emerging as a major player. Europe’s weakness lies in its lower business R&D spending. European companies are among global R&D leaders in various traditional industries, but are less present in fast-growing digital sectors such as software and computer services, where Chinese firms are starting to challenge the United States. The European Union also does not appear to be generating many new innovation leaders, especially in the digital sector, potentially jeopardising its long-term competitiveness.
The green-digital nexus: How is Europe positioned?
Digital technologies will be critical to the climate transition, and innovation at the intersection of digitalisation and decarbonisation will be paramount. Examples of enabling digital technologies include smart urban mobility and smart grids, precision agriculture, sustainable supply chains and environmental monitoring. The growth of teleworking during the pandemic illustrates how economic processes and products can increasingly be dematerialised. Innovation that uses digital technologies to achieve greener processes is of particular strategic importance for both future sustainability and competitiveness.
Europe is a global leader in green innovation, and even more so in innovation that is both green and digital – despite the United States’ leadership in most digital domains. According to the most recent data, Europe registered 50% more patents in green technologies than the United States, with Japan and China further behind. Moreover, Europe registered 76% more patents that combined both green and digital technologies than the United States, and four times more than China. Likewise, while the top global companies for digital innovation are largely American – with potential challengers from China – the top innovators for green technologies and technologies that combine green and digital elements tend to be European companies, with Japan in second